Just a few questions. Hyperinflation and world poverty.

I have two short questions and I was wondering if ATS could pitch in for answers here? My first question is about hyperinflation? I heard Peter Schiff say one time that America will never be able to pay her debt and that the likely outcome would be that the US dollar would be inflated to the point where the debts could be paid off with "junk money". Ok, makes sense. But what about the millions of Americans who have mortgages, student loan debt and other? Im Canadian, so im not sure how this will affect me. But I also don't have any debt aside from a bit of student loan debt. Do I expect to pay it off with junk money? No. But what about everyone else? Will mortgages all of a sudden become chump change? Student loan debts paid off with one paycheck?

Now my second question is about world poverty. How plausable is it to say that the US prospers because most of the rest of the world lives in poverty? I don't really know the best way to explain this. But im putting together future events in my head. US dollar hyperinflates, US pays off debt, all is well except for the hyperinflated dollar. Is there a market correction for this? Will there be justice served to anyone? Wont the rest of the world HATE the USA after this?

How about in the last 70 odd years. Has the US prospered, in part, due to 2/3 of the world living in poverty? I just really don't understand what is going on. And for what it's worth, I have a 4 year degree in commerce with concentration on economics and finance. In no way does this make me an expert on the subject, but I do understand economics. What is happening in the world now doesn't really seem like economics. Theres more than meets the eye for sure.

Can someone help give me closure?

I am not an economist (a CPA), but it seems that your theory is correct about the mortgage debt, etc. It is better to hold debt in a hyperinflationary environment than savings - since you are talking about devaluation scenario.

The problem, of course, would be that the prices of goods would hyperinflate also. We all know about Germany in the 30's. Price controls would be put into place and then there would be shortages.

I am not sure the US has benefited from the rest of the world's poverty. We are lucky that we have considerable natural resources and a large, fairly educated population. We could have shared the wealth a little better...definitely. The inequity of wealth in the US is a major problem and part of the crisis we now face. Vast wealth has centered in a few people and those people do not "share" it. Maybe they should...

I think we may be facing an inflationary depression soon. Not a very pleasant thought! Buy it now because tomorrow it may be extremely expensive (or just not available).

1) As correctly noted in the second post in this thread, hyperinflation would cause debt to melt away like butter on a hot skillet. Yes, you would be able to pay off your mortgages and student loans with "chump change."

2) In this scenario, the world would get paid back in hyperinflationary dollars, so while there would technically be no "default," the actual value of the money received would be next to nothing and it would be the same ultimate outcome as a default. Yes, the world would be mad as hell and hate America. (Even more than they already do...which is saying something indeed given the vast amount of general bile directed at the USA on all levels from all directions).


3) A hyperinflationary outcome may not happen, although I think its likely. If we jacked up the interest rates high enough, it would stem the tide of inflation and restore international and domestic investor confidence in the USA. This is precisely what happened in the early 1980s when the Paul Volcker FED raised interest rates to double-digits and held them there, dfespite howls of pain from the domestic economy. The tide of inflation from the 1970s was stemmed, confidence in the US was restored, and we entered a liong 25-year boom. Its interesting to note that Obama has the very same Volcker as part of his economic team.

HOWEVER, for a variety of reasons, I think the US is less likely to take this "bitter medicine" of high interest rates, even though it would be in our long-term interests. This is because we have so much more debt now on every level (personal, corporate, and governmental) that the temptation to hyperinflate out of it will be greater. Moreover, the cost of servicing this debt with higher interest rates would literally break the backs of many individuals and companies. The short-term pain would be enormous, perhaps greater than the great depression. I don't think people have the stomach or the spine for it. If the govt starts to go down this road, the protests will be intense and the pressure to lower interest rates will be gargantuan. We are also less far-sighted and long-term-thinking oriented than we used to be, so few will be able to argue persuasively for the long-term benefits of higher interest rates in the face of the severe pain.

For all these reasons, I think the US will take the "easy way out" and hyperinflate. This, of course, will bring its own form of pain in the sense that in the medium-to-long term (depending on how severe it is), high inflation destroys the value of all capital and holdings. Still, it will be the "path of least resistance" for a heavily indebted USA.